The Result:

Markovits, Stock & DeMarco prevailed and a settlement with a total value of $153 million was reached.

The Case

This case revolved around a series of allegedly false and misleading statements mortgage giant Fannie Mae made to investors regarding its accounting policies and internal controls.

On September 22, 2004, Fannie Mae’s regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), publicly announced that as a result of an investigation into Fannie Mae’s accounting policies and internal controls, OFHEO concluded that Fannie Mae and the Individuals had misapplied GAAP to distort financial results and “smooth” earnings growth from quarter to quarter. A few months later, Fannie Mae announced that it would restate its financial statements from 2001 to mid-2004 by an estimated $9 billion – and, according to MSD’s legal theory, substantially damaging its shareholders in the process.

The Court appointed Markovits, Stock & DeMarco to serve as Lead Counsel on behalf of a certified class of investors (led by its clients the Ohio Public Employees Retirement System and the State Teachers Retirement System).

The case’s size and scope were massive – even by MSD’s standards. There were five defendants (and five defendant law firms): Fannie Mae, its accounting firm KPMG, Fannie Mae’s CEO, Fannie Mae’s CFO, and Fannie Mae’s Controller. It involved the production of more than 67 million pages of documents, 108 fact witness depositions, 35 expert witnesses, and 8 summary judgment motions running in the thousands of pages of briefing materials.

Some cases call for a nimble, light-staffed approach. And some cases call for the litigation equivalent of trench warfare.

Some cases call for a nimble, light-staffed approach. And some cases call for the litigation equivalent of trench warfare.

The Result

After more than ten years of litigation (including more than a year of mediation), the parties agreed to a global settlement of $153 million – a staggering victory considering that Fannie Mae’s regulator had taken the unprecedented step of placing Fannie Mae into conservatorship in September 2008.

The victory was even more staggering considering that the Conservator promulgated a rule in 2011 that effectively prohibited the payment of securities litigation claims while Fannie Mae was in conservatorship – effectively erasing the class’s ability to recover a judgment against Fannie Mae.

In other words, MSD was able to successfully resolve this case against a defendant who was on the brink of receivership, and in a situation in which the U.S. Government had implemented a regulation specifically designed to make MSD’s success impossible.

The Strategy

MSD has developed a unique expertise in the context of large, complex financial services litigation. This case required all of that expertise – and then some.

To position the case, we had to become adept at explaining the impact of several arcane financial accounting standards on Fannie Mae’s business practices. First, we worked with nearly a dozen accounting professionals to understand how these arcane financial accounting standards worked and how they affected Fannie Mae’s balance sheet.

Second, we spent weeks and weeks finely crafting our central case narrative. We call it the “mother test”: If we can’t explain our case to one of our mothers within 30 seconds, then we don’t deserve to present it to a jury. Given the complexity of the subject matter and the case, the “mother test” was a back-breaker.

Once our narrative finally passed the “mother test,” however, our greater litigation strategy fell into place, and we used this narrative to guide everything we did in the case – from discovery requests, to deposition questions, to summary judgment papers.

Creating Victory

Some cases call for a nimble, light-staffed approach. And some cases call for the litigation equivalent of trench warfare. This was a trench warfare case. At every turn, MSD was vociferously opposed by five of the largest, most well-respected law firms in D.C. (and, at certain points, a sixth set of lawyers from the government). And so MSD’s strategy in this case was to fight fire with fire.

MSD litigated every issue in this case as though it were the central issue. We dug in, worked hard, and advanced our position, inch-by-inch. We took no short cuts, and we never let the defense counsel’s assertions go unchallenged or unanswered. After years of this aggressive, unyielding approach, we wore down the defendants and achieved a truly momentous settlement for the Company’s damaged shareholders.

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